Student Loans and Paying for College (Part 1)

Student Loans and Paying for College (Part 1)

I can’t tell if the money is coming out or going into the hat. Image courtesy of saleshq.com

So you got accepted to the school of your dreams?

Congratulations! I’m happy for you! My next question merits a bit of scary thought. How are you going to pay for attending that school? Maybe you have wealthy relatives. If so, count your blessings and the rest of this post is irrelevant for you so you can move on to something else.  For the rest of us…paying for college is no laughing matter. Cost is one of the top determinants of where an individual chooses to attend college (I was one of these individuals). As tuition continues to rise and the job market continues to flounder financial aid for students is becoming a very ubiquitous issue that merits a bit of explanation and study.

Key Points

  • There are some key differences between scholarships, grants, and student loans.
  • The FASFA is arguably the most important financial aid form to complete.
  • Scholarships, grants, and student loans are the most popular methods to pay college costs.
  • Your financial aid office at your school is your friend not your foe.

Grant, Scholarship, or Loan?

Let’s start with the good news. There are entities out there who will give you free money to attend school. These entities can be the school you choose to attend, the company your parent(s) work for, or even the federal government. This “free money” or “gift aid” is usually referred to as grants and scholarships.  Grants are financial aid packages usually given on a financial need basis. Scholarships are financial aid packages usually given on a merit basis.  It is important to note that while scholarships and grants do not usually require repayment they may still have performance conditions attached to them (ex. You cannot fall below a certain G.P.A. while attending school). The largest provider of grants is the U.S. federal government.

Here’s the bad news: this form of aid may not cover all the costs of attending college. When gift aid isn’t enough we must turn to student loans which are loans specifically provided to individuals attending universities that do require repayment. The largest provider of student loans is again the U.S. federal government though there are private student loans offered by banks, credit unions, and universities.

How a Piece of Paper Can Save You $100,000

The Free Application for Federal Student Aid (FASFA) is arguably the most important form to fill out when it comes to financial aid for paying for college.  By filing out the FASFA you are essentially revealing to the government how much of the cost of attendance your family will have to pay (the exact term for this is expected family contribution) and how much of the bill the government will cover.  Needless to say the FASFA is a pretty thorough form that will ask family net worth, family income, number of family dependents, etc.  I do not recommend lying on this form. Why? Because the information you enter is cross referenced with the friendly, neighborhood IRS (Internal Revenue Service) and the last thing someone wants is a call from the IRS regarding the apparent fraud you filled out on the FASFA.

Different states and schools have different deadlines than the federal government (the deadline page can be found here). It is very important to not miss these deadlines as you would be missing out on free money…ouch.  Usually the deadline for the upcoming school year is before the fall of that academic year (Ex. If I were attending LSU from Fall 2015 – Spring 2016 I would have to submit the FASFA before June 30, 2015.)  Another important aspect of the FASFA is that you must reapply each year you want to receive some form of financial aid.  Why? Let’s say that your second year of college your family wins the lottery (or your father loses his job).  This new source (loss) of income will show up on your FASFA and as a result the federal government will expect a larger (smaller) expected family contribution. To capture situations like this the federal government and universities require the FASFA be completed each academic year. Thus write down your log-in information and keep it in a secret, reliable place.

Scholarships

Scholarships are a merit based form of gift aid and are arguably the most sought out form of financial aid. They are offered by universities and many private and non-profit organizations.  The best ways to find these financial gold mines are contacting the university you plan to attend or performing your own private research.

A quick caveat about private research on financial aid: Beware companies that want you to pay for scholarship or grant searches.  Most of these companies want you to pay for results you could get by googling ‘’popular scholarships”.

Once you find a scholarship that you fit the criteria for, apply.  Though sometimes a pain you are sacrificing your time for a chance to lessen that financial burden (I personally applied to a scholarship offered through the finance department at my school and received $3,000 from it. Not bad for spending an hour on the application.)  Scholarships have their own deadlines and criteria so pay close attention so you don’t miss out.

Grants

Grants are a financial need based form of gift aid and take up the greatest percentage of total financial aid offered to students.  They are commonly offered by both colleges and the federal government.  The federal government has quite a few notable grant options which will be discussed in part two.

Apart from being based on financial aid vs. merit, grants function in the same way as scholarships. Based on the results of the completed FASFA different grant options may be available.  Once again grants may have terms attached to them so be sure you understand the terms of agreement when you accept the financial aid.  What do you do if the scholarships and loans are not enough? Other than working three part time jobs, you may want to consider taking on a student loan.

Student Loans

So you have crunched some numbers and discovered that the grants and scholarships just won’t cover all of the expenses. Now what?  You could put the remaining costs on a high interest credit card and bite the bullet, but I would not recommend that.  Seeing the need for a reliable source of student loans the U.S. Department of Education created a loan program to help fill the gap in paying for all of college costs. Some banks and other financial institutions began to offer student loans. The major distinction in the world of student loans is that there are federal student loans (government) and private student loans (non-government).  In many of the cases federal student loans have some key characteristics (fixed low interest rate, possible tax reductions, and post-graduation payment plans) that make them superior to most private student loans.  To apply for a federal student loan you must complete your FASFA (told you it was kind of important) and the results of the FASFA will dictate which types of federal loans you are eligible for.

 

Student with ball and chain attached
You shouldn’t feel like this. Image courtesy of McCarthy’s Weekly.

 

If there is one take away from this lesson let it be this: Your school’s financial aid office is your friend when it comes to paying for college; go to them if you have financial concerns.  For now let’s look a bit more in depth at the different types of federal grants and loans available to students.

Definitions

  1. Grant: A need based form of gift aid which usually does not require repayment.
  2. Scholarship: A merit based form of gift aid which usually does not require repayment.
  3. Student loan: A loan made to a student in college which may either be administered by the federal government or a private financial institution.
  4. Cost of attendance: The total cost of attending a particular university for a certain period of time (usually a year) and includes expected costs such as tuition, room and board, books and supplies, etc. This metric is used in calculating the amount of financial aid offered.
  5. Expected family contribution: The expected dollar amount the family of a student is expected to contribute to college expenses. This metric is used in calculating the amount of financial aid offered.

Further Reading

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